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I'll say it again. The
secret of economic success can be summed up in four words:
Low Taxes, Stable Money
"Low Taxes" can
take a number of forms. Some countries have had high marginal income tax
rates, but the tax applies at very high incomes and taxes on capital are low,
so most people experience low taxes. Other countries have no income tax at
all, and rely on tariffs or other means for revenue. This was true of the US
and Japan in the 19th century. One of the most successful formats has been
the "flat tax," a very simple income tax typically in the
mid-teens. Hong Kong is perhaps the pioneer of this system, with a 17% income
tax, 16% corporate tax, and no taxation of interest income, dividends,
capital gains, or inheritances. There is no payroll tax or sales tax/VAT
either.
Estonia was the flat-tax
pioneer in post-Soviet Europe, with a 26% flat tax implemented in 1993. This,
plus a deutschemark currency board (stable money) pulled the economy out of
hyperinflationary disaster in the early 1990s. Since then, the country has
gone from success to success, and is gradually becoming a rather fashionable
place.
The next big step was
Russia in 2000, with its revolutionary 13% flat tax. Russia was a true
disaster in the late 1990s, but since then it has enjoyed explosive growth,
with nominal GDP increases (measured in dollars) in the mid-20% range.
Today we can count quite
a few Eastern European countries with low/flat taxes of 20% or less:
Bosnia-Herzegovina (not
"flat" but top rate under 10%)
Georgia (12% effective 2005, replaces system with 20% top rate)
Romania (16% effective 2005)
Russia (13% effective 2000)
Serbia (14% effective 2003)
Slovakia (19% effective 2004)
Macedonia (10% corporate and personal, effective 2007. Replaces 15% corporate
and 24% personal top rate)
Ukraine (13% effective 2004)
Kazakhstan (10% effective 2007)
Kyrgystan (10% effective 2007, replaces system with 20% top rate)
Mongolia (10% effective 2007, replaces system with 40% top rate)
Estonia (26% effective 1994, 22% today but headed to 18% in 2011)
Latvia (25% effective 1995) and Lithuania also have "flat taxes",
but at rates over 20% plus high VAT rates, that doesn't really cut it in my
book.
The man to talk to about
flat taxes worldwide is Alvin Rabushka, an acquaintance of
mine, who keeps close tabs on the spread of flat taxes and their positive
economic effect.
Now pay attention: this
is the interesting bit.
One effect of the flat
tax is to also help create monetary stability. The result is -- Low Taxes,
Stable Money -- and wonderful economic growth throughout the region. How far
can it go? Hong Kong was once a backwater manufacturer of cheap consumer
goods. Now it is a leading "first-world" city. If Hong Kong,
population 6 million, can do that, then certainly Slovakia, population 5
million, can do something similar. I would not be surprised if, sometime in
the future, Slovakians quietly pass West Germans in the wealth and abundance
game, just as Hong Kongers have surpassed Americans. Probably nobody will
notice when this happens.
Flat taxes help create
monetary stability because one result of lower taxes and higher growth is
greater monetary demand, which tends to make currencies rise. Most currency
managers, including those of the above-listed countries, are rather
incompetent. However, when their currencies get a rising trend powered by the
flat tax and growth, they are at least able to suppress the currency a bit,
keeping it roughly in line with whatever their benchmark may be, in this case
the euro. (Most countries have also committed themselves to joining the eurozone
in a number of years, which requires them to essentially peg their currencies
to the euro.) As the currencies become more stable and predictable, interest
rates plummet from perhaps the 15% range to eurozone rates under 8%. This
helps enable an enormous expansion of finance, another economic driver. Plus,
more stable currencies are a great boon to international trade, which is very
important to these small countries. So, you have much lower taxes PLUS a more
stable currency PLUS much lower interest rates PLUS a credit boom PLUS better
trade conditions, leading to huge growth.
All of that from a simple
tax policy!
It has also helped that
most major currencies have had a declining trend versus gold, which once
again makes currency management relatively simple for these small countries
-- simple enough that even dunces can handle it.
This huge success --
repeated over and over again with the same results -- is getting a lot of
attention from more sclerotic governments such as those in Germany or
Austria. We could see Poland, Hungary and the Czech Republic go the flat-tax
route within five years. I've got my eye on Turkey, a country of 71 million
people. That's almost as much as Germany (82 million). What would happen if
Turkey adopted a flat tax? Woo hoo!
I've got a better idea. A
few months ago, I was invited to a breakfast with the finance minister of
Turkey, a surprisingly capable man. I could tell just by listening to him
speak for about ten minutes that he is NOT a dunce. He brought up a
surprising statistic -- that only about 10% of the Turkish government's
entire tax revenue comes from the income tax (I'm working from memory here).
The top rate is 40%. At the same time, there's an 18% VAT. You see, the FM of
Turkey thinks about this stuff. I can tell. "Well, we aren't actually
getting much money from this tax...is it really necessary?"
The 18% VAT sounds a lot
like proposals in the US (from Mike Gravel for instance) to replace income
taxes with a "federal sales tax" of about 19%. For Turkey I propose
-- not a flat income tax -- but no income tax at all! This could be
accomplished in a series of stages over about three to five years. For
example, the top 40% rate could be reduced to 20% the first year, 10% the
third year, 5% the fourth year and eliminated in the fifth year. Turkey has
already moved in this direction somewhat, as it lowered its corporate tax
from 30% to 20% in 2006. The corporate rate could be reduced to 10% in year 2
and eliminated in year 5. The result of such a policy, as shown by the eight
flat-taxers above, would be a roaring expansion of of economic activity
accompanied by a roaring expansion of tax revenue.
Now if you think Turkey
would be a bombshell with a flat tax (or no tax), what
about China? In 2003-2005, China reduced and then
eliminated agricultural taxes for 900 million farmers -- probably the first
time farmers have been able to operate tax-free in 5000 years. I think this
is one thing powering the Chinese economy today. China has the Grandfather Of
Them All -- Hong Kong -- in its backyard, and maybe Mongolia will soon be
teaching the Chinese a few lessons.
One of the reasons why I
concentrate on Stable Money more than Low
Taxes is because we already have several governments who are
absolutely knocking the ball out of the park with their low-tax policies. We
also have a pretty good network of low-tax advocates, such as Alvin Rabushka.
How many governments have gold standards? Right -- zero.
If you think things are
pretty spiffy with flat taxes in Europe, or lower taxes in China, you have no
idea what is possible when the forces of economic creation are fully lined up
in mega-growth mode -- when flat-tax type systems are paired with a
fully-functional gold standard. That will be something to see.
* * *
A reader brought up a
good point regarding fuel economy. You save (or, in our terminology, don't
use) more fuel going from 25mpg average to 50mpg than you do going from 50mpg
to 500mpg. 50mpg is not really a very high hurdle. Here are two more SUV
alternatives, available for sale now or within five years.
Audi A2
better than 3l/100km (about 75mpg)
175,000 units sold 2000-2005
Seats four. Roughly
2000 lbs.
Aptera Typ-1
230mpg at 55mph
Seats 2 plus storage
0-60 in under 10 seconds
approx 900 lbs
expected sale price around $20,000
www.apteramotors.com
Now, this is even more
promising than the Loremo in my opinion. Considerably better acceleration,
and much better gas mileage. Note that most super-mileage statistics are for
more like 20mph, where the wind resistance is much lower, and for designs
with rather piteous acceleration, fully optimized for maximum efficiency.
That said, we are really
better off with trains for urban areas -- and most people live in (sort-of)
urban areas.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street Journal
Asia, the Japan Times, Pravda, and other publications. He has appeared on
financial television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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